ASX mining shares have been powering ahead over the past year as the sector has become somewhat of a safe haven amid the global economic volatility, but some of these stocks are starting to fall out of favour with a top broker downgrading three in the sector yesterday.
But this doesn't mean it's time to go underweight on mining stocks as many of the favourite S&P/ASX 200 (Index:^AXJO) (ASX:XJO) miners still represent good value thanks to their cash-laden balance sheet and low production cost positions.
In fact, the recommendation downgrades by Macquarie Group Ltd (ASX: MQG) is linked to two specific commodities with the broker sticking to its "buy" recommendation for most ASX miners under its coverage.
Coal and alumina on the nose
However, the two commodities that Macquarie thinks are under pressure are alumina and coal with its analysts making "material cuts" in their latest forecast update.
"The most material changes are 5% and 10% cuts to our alumina price forecasts for CY19 and CY20. Coking coal also suffers falling 5% in CY19 and 3% in CY20," said Macquarie.
"Our thermal coal price forecast also takes a hit, falling 6%. Other changes to bulk commodity and base metal prices largely reflect mark-to-market adjustments."
Most impacted miners
The more bearish estimates for alumina and coal seems to have hit South32 Ltd (ASX: S32) the hardest as the diversified miner is exposed to both these commodities.
"The cuts to our alumina and coking coal prices have weakened the earnings outlook for S32," said the broker.
"The stock is now offering free cash flow yields of ~6% for FY20 and FY21 and given the downside risk to consensus earnings we cut our rating to Underperform."
But South32 isn't the only stock in the sector to suffer a cut. The changes in the coal forecasts have also prompted Macquarie to lower its recommendation on the Whitehaven Coal Ltd (ASX: WHC) share price and New Hope Corporation Limited (ASX: NHC) share price.
"The reductions in our CY19 and CY20 coking coal prices and CY19 cut for thermal coal has weakened the outlook for both WHC and NHC," added Macquarie.
"We downgrade WHC to Neutral and NHC to Underperform due to the added uncertainty on the outlook for New Acland."
Gold still shining bright
Meanwhile, Macquarie sees value in the gold sector even though most of the ASX-listed gold miners have surged ahead of the broader market.
The outperformance of gold stocks has put the sector in the firing line of short-sellers but I too think it's too early to sell the sector.
Macquarie's top gold picks are Northern Star Resources Ltd (ASX: NST), Evolution Mining Ltd (ASX: EVN) and Saracen Mineral Holdings Limited (ASX: SAR).
